Chapter 16 Wholesaling and Distribution: Markets and Institutions

Sommers Barnes
Ninth Canadian Edition
Presentation by

Karen A. Blotnicky Mount Saint Vincent University, Halifax, NS

Copyright 2001 by McGraw-Hill Ryerson Limited

Chapter Goals
To gain an understanding of: The nature and economic justification of wholesalers and retailers Differences across three categories of wholesalers, merchant wholesalers, agent wholesalers and manufacturers sales facilities, and services rendered What is meant by physical distribution (PD) and the systems approach How physical distribution can strengthen the marketing plan Five subsystems within the PD system Key trends in wholesaling and PD
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Wholesaling and Wholesalers

Wholesaling: The sale, and all activities directly Wholesaling: related to the sale, of goods and services to businesses and other organizations for resale, use in producing other goods or services, or operating an organization. Wholesaling middlemen or intermediaries are firms primarily in wholesaling. The gap between (a) producer and (b) retailer and/or users is filled by a wholesaling middleman that can pool the orders of many buyers and furnish a market for the small producer.
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More About Wholesaling

Wholesaling brings to distribution economies of skills, scale, and transactions. Wholesaling skills are concentrated in the hands of wholesaling middlemen so there is less duplication of effort on the part of producers. Economies of scale result from the specialization of wholesaling middlemen performing functions that might require several small departments within producing firms. Transaction economies result from the fewer number of transactions that are needed between producers and retailers.
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Four producers each sell directly to six retailers, resulting in 24 transactions:

PRODUCERS

1
RETAILERS

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Four producers use the same wholesaling middleman, reducing the number of transactions to 10:
PRODUCERS

WHOLESALING INTERMEDIARIES

RETAILERS
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Categories of Wholesalers
merchant wholesalers take title to the products that they handle; perform wide range of services manufacturers sales branches and offices are owned and operated by the manufacturers agents and brokers negotiate sales but do not take title to the products they sell primary products dealers deal primarily in raw materials such as agricultural products
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WHOLESALING INTERMEDIARIES

MERCHANT WHOLESALERS, CHARACTERINCLUDING: ISTICS

AGENTS AND BROKERS:

CHARACTERISTICS

MANUFACTURERS SALES FACILITIES, CHARACTERINCLUDING: ISTICS

Full service Truck jobbers Drop shippers

Independently Manufacturers owned agents Take title to Brokers products being distributed.

Owned and Independently Branches (carry stocks operated by owned manuof merchan Do not take facturers dise being title to distributed) Perform products sales being Offices (do function distributed not carry Actively stocks) negotiate sale or purchase of products
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Merchant Wholesalers
full-service wholesalers perform a wide fullrange of services for the suppliers they represent they take title to the products that they carry they generally operate warehouses, create assortments, and arrange delivery they buy in very large quantities and sell to small customers in the assortments they need other wholesalers include truck jobbers and drop shippers
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Manufacturers Sales Branches

Manufacturers sales branch: An establishment that engages primarily in wholesaling and is owned and operated by a manufacturer but is physically separated from manufacturing plants. A manufacturers sales branch carries a stock of the product being sold. A manufacturers sales office does not. Primary Product Dealers: Resellers of primary products-- fish, vegetables, grains.
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Agent Wholesalers
these are independent businesses which may represent a number of suppliers they do not take title to the products they sell manufacturers agents are generally smaller firms that operate on commission; they are usually assigned to a specific territory brokers often do not work on a continuing basis with suppliers but will bring buyers and sellers together; may not ever see the product
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More Agent Middlemen

Commission Merchants set aside the product, often physically handle it, determine price and conditions of sale, complete the sale Auction Companies assemble buyers, sellers and product, allow for buyers to inspect product, allow the transactions to be completed
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Even More Agent Middlemen

Selling Agents take over the entire marketing responsibility from clients and market their entire output Import/Export Agents bring together buyers and sellers in different countries
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Nature and Importance of Physical Distribution (PD)

Physical distribution: All activities concerned with moving the right amount of the right products to the right place at the right time. Physical distribution can be used strategically to strengthen a firms market position
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The Systems Approach to PD Management

Manipulating the five elements of the PD system to create an environment which delivers the best customer service at the most reasonable (not necessarily lowest) Total Cost As Total Cost is decreased, so is customer service As Total Cost increases, so does customer service The goal is to find a balance to deliver the service level desired by the target market
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Impact on Marketing Strategy of a Good PD Plan

Improve customer service. Reduce distribution cost. Create time and place utilities storage creates time utility, and transporting the goods to where they are desired creates place utility. Stabilize prices by storing products or moving them to other markets. Influence channel decisions. Control shipping costs.
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Physical Distribution Management

Physical distribution management: Development and operation of processes resulting in effective and efficient physical flow of products. An effective physical-distribution system is built around five interdependent subsystems: Order processing procedures for handling and filling orders should cover billing, granting credit, preparing invoices, and collecting pastdue accounts. Inventory control the goal is to minimize both investment and fluctuations in inventories, while filling customers orders promptly and accurately.
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More Tasks in PD Management

Inventory location and warehousing decisions must be made about size, location, handling, and transporting of inventories. Materials handling proper equipment can minimize losses from breakage, spoilage, and theft and can reduce handling costs as well as time required for handling. Transportation shipping products to customers involves decisions on both the form of transportation and particular carriers.

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Market Response Systems

Market response systems encompass several methods that manufacturers, food distributors, and grocers are using to cut waste: Continuous replenishment manufacturers use information from stores scanners to replenish a grocers inventory. Electronic data interchange (EDI) orders and invoices move from computer to computer rather than through the mail. Electronic funds transfer money moves without cheques or cash.
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Customer Service and Economic Order Quantity (EOQ)

Inventory size is determined by balancing costs and desired levels of customer service. Economic order quantity (EOQ) is the volume at which inventory-carrying costs plus orderprocessing costs are at a minimum. As order size increases, inventory-carrying costs go up and order-processing costs go down. The actual order quantity is often higher than EOQ. This trade-off provides a desired level of customer service while at the same time lowering inventory costs.
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More About Market Response Systems

Cross-docking manufacturers build displays on pallets so they can be moved directly into stores with little handling in the warehouse or store. Category management sales and demographic information are used to determine optimal assortments and shelf space allocations.
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Benefits of Market Response Systems

Cuts time inventory sits in warehouse. Fewer out-of-stock experiences for consumers. Potentially lower prices. Potential industry-wide savings of $30 billion annually.
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Warehousing
Public warehouse provides storage and warehouse: handling to various firms for a fee Private warehouse is owned and warehouse: operated by a single firm, useful if: Volume is year-round and large, and has special storage requirements Distribution Centre: a single, larger storage facility which includes an order processing and distribution function
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Materials Handling
Materials Handling - proper equipment can minimize losses from breakage, spoilage, and theft and can reduce handling costs as well as time required for handling. Containerization - cargo-handling system that has become standard practice in physical distribution
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Transportation
May include more than one method intermodal (such as boat-trucktrain-truck) Piggyback truck/train Piggyback: Fishyback: truck/ship Specialized facilitators: Freight forwarders Package-delivery firms PackageCopyright 2001 McGraw-Hill Ryerson Limited 16 - 25